Final answer:
There are two types of warranties: express warranty and implied warranty. Express warranties are clear and explicit promises made by the seller, while implied warranties are inherent in the sale. From an accounting perspective, warranties are seen as future expenses for the seller.
Step-by-step explanation:
Types of Warranties
There are two types of warranties:
- Express Warranty: An express warranty is a clear and explicit promise made by the seller about the quality or performance of a product. This can be in the form of a written statement, an advertisement, or even a verbal assurance. The seller is legally obligated to fulfill the terms of the express warranty.
- Implied Warranty: An implied warranty is not stated explicitly but is inherent in the sale. There are two types of implied warranties:
- Implied Warranty of Merchantability: This means that the product is fit for its ordinary purpose and is of reasonable quality. For example, if you buy a new smartphone and it stops working within a week, the implied warranty of merchantability would entitle you to a replacement or return.
- Implied Warranty of Fitness for a Particular Purpose: This means that the product is specifically suitable for a particular purpose as expressed by the buyer. For example, if you tell the salesperson that you need a laptop for graphic design, and they recommend a specific model, there is an implied warranty of fitness for that purpose.
Accounting for Warranties
From an accounting perspective, warranties are seen as future expenses for the seller.
- If the warranty is for a short period and the cost can be reasonably estimated, the seller records an expense at the time of sale, which is offset by an increase in the liability account for warranty.
- If the warranty is for a long period or the cost cannot be reasonably estimated, a portion of the revenue is recognized as unearned and liability account for warranty is increased.